Why Alternative Assets?
Today many retail investors see Bitcoin, NFT artwork, and even sneakers as viable alternatives to stocks and bonds. According to a 2020 survey by Connection Capital, 87% of private investors intended to maintain or increase their allocation to alternative investments over the next 12 months. JP Morgan even subtitled their 2021 Global Alternatives Outlook report with “Alternatives: from optional to essential”, sending a clear message that alts should be taken seriously.
I co-founded Delphia because I’m passionate about levelling the playing field for retail investors. Our work focuses on making quantitative hedge fund strategies available to retail investors for free, and alts plays a big part in that. Last year Preqin predicted AUM for alts would hit $17 trillion by 2025, a 60% increase from $10.74 trillion at the end of 20201. While the bulk of this growth has been driven by institutional investors looking for diversification and higher risk-adjusted returns, there’s also been impressive uptake by HNW individuals and retail investors.
So, why are investors embracing alternative investments?
Potential for Higher Risk-Adjusted Returns
Poor yields on US government bonds and the low interest rate environment have left investors scrambling to find new safe havens. The classic 60/40 allocation of stocks to bonds makes little sense given that the 10-Year Treasury Bond yield is sitting at a measly 1.32% as of September 2021. Investors will likely find higher risk-adjusted returns with alternative investment vehicles such as REITs, private equity, and some commodities.
A Welcome Relief From Non-Stop Volatility
The past 18 months have been characterised by record-breaking volatility. The 11-year bull market came to a swift end in March 2020 with the Dow Jones’ 3000 point drop on March 16th marking the largest ever single-day drop in U.S. stock market history. Thanks to unprecedented levels of economic stimulus, recovery was swift with the index hitting a record high by November. The Cboe VIX volatility index showed numerous spikes throughout 2020, including jitters over the US election and equity reversals.
Alternative investments often have low correlation with public markets, providing an attractive diversification option for investors looking to reduce their overall portfolio volatility. Examples include real estate, commodities, and even luxury assets like fine art or wine.
Hedge Against Inflation
As the global economy continues to emerge from the COVID-19 pandemic, economists anticipate that strong recovery could bring several years of higher inflation. A survey by the Wall Street Journal in July 2021 revealed forecasts of 2% through 20232. Alternative investments can be a way to protect against the volatility of the fiat currency system when included as one component of a broad and balanced portfolio. Interesting alternatives to explore are real estate and leveraged loans which can both be accessed through ETFs.
Alts Are More Accessible Than Ever Before
Technology-enabled platforms for everything from sneakers and digital artwork to music royalties has made alternative investments more accessible than ever before. Individual investors can now buy a share in a classic car through the fractional ownership platform Rally, or build a fine wine portfolio with the mobile app Vinovest. These platforms have removed barriers such as high investment thresholds, a lack of transparency, and the specialized knowledge needed to identify opportunities.
Investment Tools For This New Reality
As well as making alternative investments more accessible to retail investors, tech can also help them achieve better returns. Delphia is an AI-powered platform that turns user data into algorithmic investment strategies. While hedge funds and big institutional investors use machine learning algorithms trained on user data all the time, there’s nothing like that available for individual investors.
At Delphia, we want to change that and level the playing field. We believe that by pooling data like Amazon purchase histories, Robinhood trading data, and social media activity from our members, we can build an algorithmic trading strategy that rivals the world’s best hedge funds. Think of us as the first-ever investment advisor to let people invest their data alongside their money, in order to pursue better returns.
Interested in alts? Don’t forget to follow our Substack for more in-depth analysis and insights on everything from private equity opportunities for retail investors to sneakers, fine art, and NFTs.
Preqin, “Future of Alternatives 2025”
Wall Street Journal, “Higher Inflation Is Here to Stay for Years, Economists Forecast”